Comment letter to SEC (January 2005)

American Academy Of Actuaries Committee On Property Liability Financial Reporting

Description

January 24, 2005 The Honorable William H. Donaldson Chairman U.S. Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Re: Tabular Disclosure of Contractual Obligations Dear Mr. Donaldson: 1The purpose of this letter is to provide comments from the American Academy of Actuaries’ Committee on Property and Liability Financial Reporting ("the Committee”) to the Securities and Exchange Commission (SEC) on Financial Reporting Release (FRR) No. 67, requiring tabular disclosure of payments due under contractual obligations for specified time periods. This letter focuses on disclosures related to property and casualty insurance contracts. We believe similar issues may exist with regard to other insurance contracts and pensions, and may respond separately with regard to those areas at a later date. Most importantly, the Committee questions whether it is appropriate to include property and casualty insurance liabilities in this disclosure. The specified categories of contractual obligations in FRR 67 are all contracts with fixed terms for both amount of payment and timing of payment. Balance sheet amounts for property and casualty insurance liabilities are estimates and future payments are not generally fixed as to amount or timing. Therefore, the category of property and casualty insurance liabilities in the tabular disclosure will contain estimated future payments that will differ, perhaps significantly, from ...

Informations

• Publié par: Urre
• Nombre de lectures: 27
• Langue: English

Extrait

January 24, 2005

The Honorable William H. Donaldson

Chairman

U.S. Securities and Exchange Commission

450 Fifth Street N.W.

Washington, D.C.

20549

Re:

Tabular Disclosure of Contractual Obligations

Dear Mr. Donaldson:

The purpose of this letter is to provide comments from the American Academy of Actuaries’

1

Committee on Property and Liability Financial Reporting ("the Committee”) to the Securities and

Exchange Commission (SEC) on Financial Reporting Release (FRR) No. 67, requiring tabular

disclosure of payments due under contractual obligations for specified time periods.

This letter focuses

on disclosures related to property and casualty insurance contracts.

We believe similar issues may exist

with regard to other insurance contracts and pensions, and may respond separately with regard to those

areas at a later date.

Most importantly, the Committee questions whether it is appropriate to include property and casualty

insurance liabilities in this disclosure. The specified categories of contractual obligations in FRR 67 are

all contracts with fixed terms for both amount of payment and timing of payment.

Balance sheet

amounts for property and casualty insurance liabilities are estimates and future payments are not

generally fixed as to amount or timing.

Therefore, the category of property and casualty insurance

liabilities in the tabular disclosure will contain estimated future payments that will differ, perhaps

significantly, from actual future payments.

Property and casualty insurance liabilities are generally not

discounted because of this uncertainty with respect to amount and timing of future payments.

Also,

property and casualty insurance liabilities are already subject to extensive disclosure that is tailored to

the unique characteristics of these liabilities.

In particular, reporting includes Loss Development Tables

that include 10 years of historical data (also known as “triangles”) of both liabilities and payments.

In

addition, property and casualty reserve liabilities often include disclosures of other significant sources of

variability, unlike many of the liabilities contemplated in FRR 67.

1

The American Academy of Actuaries is the public policy organization for actuaries practicing in all specialties within the United States.

A major purpose of the Academy is to act as the public information organization for the profession.

The Academy is non-partisan and

assists the public policy process through the presentation of clear and objective actuarial analysis.

The Academy regularly prepares

testimony for Congress, provides information to federal elected officials, comments on proposed federal regulations, and works closely

with state officials on issues related to insurance.

The Academy also develops and upholds actuarial standards of conduct, qualification,

and practice, and the Code of Professional Conduct for all actuaries practicing in the United States.

1100 17

th

Street NW Seventh Floor Washington D.C. Telephone [phone] Facsimile 202 872 1948

www.actuary.org

Hon. William H. Donaldson

January 24, 2005

Page 2 of 3

The Committee does not believe that disclosure of an estimated payout of liabilities is particularly useful

to the investor.

However, the Committee recognizes that the SEC may believe otherwise.

In that case,

the Committee recommends adjusting the disclosure to be more tailored to the nature of property and

casualty insurance liabilities.

The Committee thinks such tailored disclosure could be accomplished by aligning disclosure of

estimated future payments with existing disclosure on Loss Development Tables.

Such disclosure

would put the payment estimates directly in the context of historical payments over the past 10 years.

This serves as illustration for the reader that insurance liabilities and their future payments are estimates

subject to variation.

The existing triangle table presentation is of liabilities on a net of reinsurance basis.

This expanded presentation would include the payout estimate of the balance sheet liabilities reduced for

recoveries under reinsurance treaties, as well as estimated recoveries under reinsurance treaties.

We

believe such presentation would be more comprehensive, useful and relevant than a presentation that

isolates and estimates the payout of the gross liabilities on the balance sheet.

Such an approach would

address several potentially difficult technical issues, such as cash flows from reinsurance, and liabilities

for amounts underneath the deductible on large deductible policies and for structured settlements

without a release from the claimant.

If property and casualty insurance company registrants are

obligated to estimate the payout of gross liabilities as stated on the balance sheet, we believe that

additional technical guidance would be needed on each of these issues.

There is one technical issue that remains under our suggested approach.

To the extent property and

casualty insurance liabilities do have future payments that are reasonably fixed and determinable,

discounting is allowed.

Future payments will include the “unwinding” of that discount.

Therefore, in

order to properly estimate future payments, net liabilities should be grossed up to include the discount

amount and that grossed-up amount should be included in the future payment table.

We have provided a mock-up of our suggested disclosure, in the event that the SEC believes additional

disclosure is necessary.

We hope these comments are useful to the SEC and are available to discuss

these issues.

Thank you for your consideration.

Sincerely,

Nancy Watkins, FCAS, MAAA

Chairperson, Committee on Property and Liability Financial Reporting

cc:

Mr. Jonathan G. Katz

Secretary

Securities and Exchange Commission

Mr. Scott Taub

Deputy Chief Accountant

Securities and Exchange Commission

Hon. William H. Donaldson

January 24, 2005

Page 3 of 3

LOSS DEVELOPMENT TABLE

PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT -

NET OF REINSURANCE

FOR THE YEARS ENDED DECEMBER 31

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Liabilities for unpaid claims and

claim adjustment expenses, net of

reinsurance

7,500

7,500

7,700

8,500

8,500

8,600

8,300

8,200

8,600

8,800

9,000

CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES

One year later

1,700

1,800

1,600

1,800

1,600

2,000

2,000

2,200

2,200

2,300

Two years later

2,900

2,800

2,800

2,800

2,900

3,200

3,300

3,500

3,700

Three years later

3,600

3,600

3,500

3,700

3,700

4,100

4,300

4,600

Four years later

4,200

4,200

4,200

4,300

4,300

4,800

5,100

Five years later

4,600

4,800

4,600

4,800

4,800

5,400

Six years later

5,100

5,100

5,100

5,200

5,400

Seven years later

5,400

5,500

5,400

5,700

Eight years later

5,800

5,900

5,900

Nine years later

6,100

6,200

Ten years later

6,500

Net Liabilities

9,000

Estimated Future Payout

Discount

300

TOTAL < 1 Year1-3 Years3-5 Years >5 yrs

Net Liabilities

Undiscounted

9,300

9,300

2,000

3,000

2,000

2,300

LIABILITIES REESTIMATED

One year later

7,500

7,700

8,400

8,500

8,400

8,400

8,300

8,300

8,800

9,200

Two years later

7,700

8,500

8,400

8,400

8,200

8,400

8,400

8,500

9,200

Three years later

8,500

8,500

8,400

8,300

8,100

8,400

8,500

8,200

Four years later

8,500

8,500

8,300

8,300

8,100

8,400

8,200

Five years later

8,600

8,500

8,300

8,200

8,100

8,200

Six years later

8,500

8,500

8,300

8,200

8,200

Seven years later

8,600

8,500

8,300

8,200

Eight years later

8,600

8,500

8,200

Nine years later

8,600

8,200

Ten years later

8,200

DEFICIENCY (REDUNDANCY), NET OF

REINSURANCE

700

700

500

(300)

(300)

(400)

(100)

-

600

400